Arbitration Is Costly, But Potentially Lucrative

We are a week away from the date that MLB players who filed for arbitration and the teams they most recently played for, have to exchange figures prior to a potential arbitration hearing. Even if figures are traded, actual hearings are very rare; most players and teams will settle prior to seeing any arbitrators.

Sports agent Alan Nero, formerly of CSMG and currently with Octagon Baseball, had a few quotes in an MLB.com article concerning arbitration. He stated,

“Arbitration gives us the opportunity to compare people based on statistical comparables. Free agency is free enterprise. It’s based on the sole theory of economics, which is supply and demand. If there’s not enough demand, your value goes down. So [for those players], it would be more to their benefit to be statistically compared to other players, rather than be in an economic system that’s based on demand.

Marvin Miller was a genius. He knew that if he granted free agency to the clubs, that theory of economics would crush the marketplace. But when you have players that are protected by a system in which they have to be paid like comparable players, it gives them the metrics of salary increases that create a platform when they become free agents, and it lightens the supply of free agents, so that supply and demand is in their benefit. I think Marvin will prevail.”

Nero seems like a big fan of the current system of arbitration. And he should be! An arbitrator may not set the arbitration eligible player’s salary below 20% under what he received the year before. At the same time, there is no proscribed ceiling. Thus, a team cannot propose a figure below $4 million on a player who received $5 million last year, yet the player can counter by saying he is worth $10 million or more.

Statistics-based negotiations also take a lot of subjectivity out of the equation. That said, there is much subjectivity in putting weights on different values. What is more important, a pitcher’s K/BB ratio or his ERA? That same question persists in free-agency; however, there are many other variables involved that may not be as important in an arbitration setting.

A few other important notes in the MLB.com article: 1) Players and teams can invest up to $100,000+ dollars just on the preparation and actual arbitration appearance, and 2) It is awkward to make players have to sit through hearing about their flaws. Point #2 is actually one of the reasons I, and former CFL player Doug Brown, believe agents are necessary for players.